Federal Reserve studying new capital requirements for regional banks amid merger parade

The U.S. Federal Reserve on Friday approved the first of three pending bank mergers and said it’s launching a review of capital requirements for major banks including bulked-up regional players.

The Fed’s vice chair of supervision Michael Barr said the central bank is proposing a review to keep pace with changes in the banking industry, not only for megabanks such as JPMorgan Chase & Co. JPM, +1.66% but others as well.

The Fed and the Federal Deposit Insurance Corp. (FDIC) are seeking comment on several potential new requirements and resources to assure an orderly resolution of these large banking organizations, including a long-term debt requirement.

The Fed is studying whether to apply total loss absorbing capacity (TLAC), which is defined as long-term debt that could be converted to equity in times of financial distress.

Cowen analyst Jaret Seiberg said the move by the Fed to approve the $8 billion acquisition of MUFG Union Bank by U.S. Bancorp USB, +3.36% bodes well for regulatory reviews of two other major deals: Bank of Montreal’s BMO, -1.14% acquisition of BNP Paribas SA’s BNP, +1.43% Bank of the West for $16.3 billion, as well as the pending purchase of First Horizon Corp. FHN, +1.49% by Toronto Dominion Bank TD, -0.26% for $13.4 billion.

The Fed will likely phase in the TLAC long-term debt requirement for banks with $250 billion or more in assets, but any changes in rule-making would likely take at least two years, Seiberg said. The Fed is also expected to also update rules to make it easier to sell regional banks if they get into trouble.

“More broadly, this supports our view that the Democrat-led Federal Reserve would boost regional bank scrutiny, but it would not go as far as some progressives have demanded,” Seiberg said. “It is why we believe future rule changes will not be excessively onerous for the regional banks.”

The formal announcement of the Fed’s capital requirements review on Friday comes after Barr laid out his plans for the job in his first speech over the summer as the Fed’s top banking regulations supervisor over the summer.

Also Read: New Fed banking chief Michael Barr lays out vision on digital currency and keeping banks safe

Bank CEOs have also criticized increased capital requirements as diverting money away from loans that help drive economic activity.

Also Read: Bank CEOs push back on capital requirements in Capitol Hill hearings

Leave a Reply

Your email address will not be published. Required fields are marked *